My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 20, 2015

Transfer Pricing - Common Issues & New Documentation Requirements

One of the most nefarious concepts in corporate taxation is transfer pricing. Today I have a guest post by Dan McGeown, an expert on transfer pricing discussing new Organisation for Economic Cooperation and Development  ("OECD") documentation guidelines that Canadian companies are expected to follow.

What is Transfer Pricing?

Before we get to Dan’s post, a quick primer on transfer pricing. Transfer prices are the prices charged between related parties for goods, services, assets and/or the right to use intangibles. Transfer prices also include interest on related party debt, guarantee fees and factoring fees. When a transaction involves related parties in two or more different tax jurisdictions, the tax authorities become interested, with the focus being on whether the parties are paying their fair share of tax in each jurisdiction (there are often huge disagreements between countries as they fight over what they consider their share of tax dollars being shifted to another country).

Simply put, transfer pricing revolves around the the setting of the price for goods and services sold between controlled (or related) companies. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price.

As a result, transfer prices must be set following the arm’s length principle. The arm’s length principle requires that all transfer prices, and the related terms and conditions, must be established on the same basis as would occur if the parties were not related, i.e., the prices, terms and conditions should reflect what two unrelated parties would agree to in similar circumstances.

Penalties and Traps

In Canada, failing to follow the arm’s length principle exposes the Canadian entity to a 10% penalty on any transfer pricing adjustment made by the CRA. The CRA may not impose that 10% penalty when the entity has made reasonable efforts to determine and use arm’s length prices, as evidenced by preparing and maintaining Contemporaneous Transfer Pricing Documentation.

Dan advises me that some of the common issues that most often trip up Canadian companies include the following:

1. Either no analysis/documentation to support a conclusion that transfer prices are arm’s length, or self-serving analysis/documentation for transfer prices not considered arm’s length;

2. Operating losses incurred in one or more years, with no documented loss justification based on business and/or economic reasons;

3. Fluctuating operating results that are not sufficiently analyzed and documented;

4. Inappropriate cost allocations used in the determination of management services fees, i.e. costs included that would not benefit the recipient of the services; and,

5. Royalty payments being made but lower than acceptable operating results do not justify charging a royalty.

A company’s Transfer Pricing Documentation is its first line of defense in any transfer pricing audit and, therefore, it needs to be prepared from that perspective.

Speaking of documentation, Dan’s post provides an update on changing expectations in respect of transfer pricing and he briefs us on some specific Canadian requirements. I thank Dan for his blog on this controversial income tax issue.


By Dan McGeown


The prolonged recession, and the difficulties many countries were and are still having in balancing budgets and managing debt loads, caused them to focus on the perception that each country’s tax base was being eroded by companies entering into activities that created tax deductions in higher tax jurisdictions with the offsetting income being reported in low tax or no tax jurisdictions, i.e., Base Erosion. In addition, many companies were moving valuable intangibles and/or value-adding activities to low tax or no tax jurisdictions to reduce the company’s overall effective tax rate, i.e., Profit Shifting strategies.

As result of this base erosion, the Organisation for Economic Cooperation and Development (“OECD”) is now calling for three distinct levels of documentation, being: a Master File; Local Country Files; and Country-by-Country Reporting (“CBCR”). For Canadian companies both the Master File and CBCR are new requirements.

Master File

The Master File will provide: a high-level overview of the group of companies; the value chain and value drivers; a description of intangibles and where they are located; financial arrangements; where functions are performed, risks are borne and assets are employed; and the consolidated financial and tax position for the group.

Local File

The Local File for a Canadian company is the Study prepared to comply with section 247 of the Income Tax Act, focusing on the specifics relating to intercompany transactions with other companies in the group. The Base Erosion and Profit Shifting (“BEPS”) impact on Local Files is that there must be more detailed analysis and documentation regarding risks, intangibles, financing and capital transactions, and high risk transactions.

Country-by-Country Report

CBCR is effectively a risk assessment tool for the tax authorities around the world. CBCR reports jurisdiction-wide information regarding the global revenues and income, taxes paid, assets employed, number of employees and retained earnings.

There is no small business exemption relating to the requirement to prepare the Master File and Local Country File. For CBCR, only groups of companies with global revenues in excess of Euros 750 million are required to complete and file the CBCR Template.

What Does This Mean to Your Canadian Company?

If your company is the parent of subsidiaries in other countries, you will be required to complete a Master File to be shared with your subsidiary companies for filing with their respective tax authorities, and you will also be required to complete a Local File to be maintained, along with the Master File, to be provided to the CRA if and when requested by the Agency at the commencement of an audit. Whether you need to complete the CBCR Template will depend on whether your global revenues exceed Euros 750 million or approximately CA$1 billion. If so, this Template would actually be filed with the CRA no later than one year after the end of the tax year in question. The CRA would share this information with the other relevant tax authorities.

If your company is a subsidiary of a parent company elsewhere in the world, you will be responsible for preparing and maintaining the Local File, while relying on your parent company to provide you with the Master File. The CBCR Template would be filed by the parent company with its local tax authority, to be shared with the CRA and other tax authorities in accordance with the guidance put forth by the OECD.


The CRA issued three Transfer Pricing Memorandum (“TPM”) to provide its guidance with respect to certain transfer pricing issues: revised TPM-05R, Requests for Contemporaneous Documentation; TPM-15, Intra-Group Services and Section 247; and, TPM-16, Role of Multiple Year Data in Transfer Pricing Analyses.

From your perspective TPM-05R, clarifies the CRA’s expectations regarding your company’s response to a CRA request to provide your contemporaneous documentation to the Agency. The main take away for you and your company is that the CRA expects that some level of documentation will be prepared and maintained for each taxation year. Even if your company has a Study for its 2014 taxation year, the CRA will expect some form of documentation for 2015. That may mean the preparation of a Memo that confirms there have been no material changes in 2015 to all of the factual information in the 2014 Study, and testing the 2015 results against any benchmarks use in the Study.

TPM-15 elaborates on certain requirements for the analysis of intra-group service charges as set out in the Information Circular on transfer pricing, with more discussion about the use of mark-ups to reflect how arm’s length parties would charge fees for a given service to recover their costs plus an element of profit. Your company’s documentation may need to be revised to justify and support charging or paying a services fee that includes a mark-up.

TPM-16 confirms the CRA’s long held position that when you are setting your company’s transfer prices, and later testing and documenting them, the CRA expects you to use the results of a single year of data from comparable company information, as opposed to averaging multiple years of data.


Given the increasing focus on transfer pricing, both here in Canada and around the world, now is the perfect time to take stock of how your company sets its transfer prices for all of its intercompany transactions, and what support you have on file to support a conclusion that your company made a “reasonable effort to determine and use arm’s length prices or allocations.”

Note: I have disabled the comment/question feature of the Blog. I just do not have the time to answer questions during income tax season (this includes emails to my BBC or business email accounts). If you have questions or wish to engage Dan, his information is below.

Dan McGeown is a transfer pricing specialist and the National Practice Leader of BDO’s Transfer Pricing team, a team comprised of accountants and economists providing transfer pricing planning, compliance and controversy management services to a wide variety of companies having cross border transactions with related parties. You can reach Dan by phone at 416-369-3127 or by email at

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.